 "Stock broker looking at screen outside the Bombay Stock Exchange")
The number of illiquid scrips on the exchanges has seen a rise despite a surge in the markets and the shares of mid-cap companies hitting lifetime highs.
Data put up on the BSE show illiquid stocks have steadily risen in the previous year to 406 in the quarter ended June, from 366 in the September quarter last year.
Cautious sentiment, increased regulator supervision on dodgy stocks and investors’ preference towards mutual funds (MFs) for equity investment have resulted in a decline in activity in several stocks.
G Chokkalingam, founder, Equinomics Research & Advisory, said: “The number of companies getting suspended has increased in the last year thanks to increased regulator supervision on companies with governance issues. The number of people losing 100 per cent of their money has seen a rise, which is why retail investors have become more cautious.”
Investors were also mindful of dismal corporate earnings in the previous two years. “While the large firms have struggled, slowdown in growth has hurt the smaller firms much harder,” he added.
Stock exchanges identify illiquid securities at the beginning of every quarter and move these to a periodic call auction mechanism, where the stocks are traded in a separate segment for two hours a day with certain restrictions, such as limits on price movement. A stock is declared illiquid if it has an average daily turnover of less than Rs 2 lakh. Companies with market capitalisation of more than Rs 10 crore or those that pay dividends in two of the previous three quarters are excluded.
In an interview to Business Standard last week, BSE chief Ashish Kumar Chauhan said several of the 4,000 companies that traded in the exchange lacked liquidity and the exchange had invited market makers for some of the illiquid companies. “We are holding discussions with the regulator on how to the make the market-making framework attractive,” he said.
On Monday, the S&P BSE Mid-cap and the Nifty Mid-cap 100 indices hit a lifetime high in intra-day deals. Traditionally, retail investors put 70-80 per cent of their money in mid-cap stocks, said experts.
A lot of retail money in the previous two years has been coming in through the mutual fund route, not direct equity. The assets under management of equity MFs rose to a record high of Rs 4.28 lakh crore last month, more than double that of Rs 2.1 lakh crore at the end of June 2014.
According to experts, a rise in illiquid stocks can happen if a particular stock is cornered by a set of investors. The free-float of BSE mid-cap and small-cap indices stood at 40.7 per cent and 40.4 per cent, respectively, compared to 53.8 per cent for the Sensex.
Free-float market capitalisation only takes into account shares that are readily available for trading and excludes promoters’ holding, government holding and other locked-in shares.
